INSIDER: CFTC AND ETHEREUM: As The CFTC Requests Ethereum Comments, Insider Considers Commodity Designation A ‘Done Deal’

Yesterday the CFTC formally requested ‘public comment’ concerning whether or not Ethereum should be designated as a commodity or not (the ‘not’ would then throw it into the security designation and open up a whole mess of issues). Obviously, Ethereum and every coin/dapp that has been built on it has a vested interest in a commodity designation by the CFTC.

Here is the body of the request by the CFTC:

The Commodity Futures Trading Commission (“Commission” or “CFTC”) in furtherance of the LabCFTC initiative is seeking public comment and feedback on this Request for Input (“RFI”) in order to better inform the Commission’s understanding of the technology, mechanics, and markets for virtual currencies beyond Bitcoin, namely here Ether and its use on the Ethereum Network. The Commodity Exchange Act (“CEA”) grants the Commission regulatory authority over the commodity futures markets. The Commission is seeking public feedback in furtherance of oversight of these markets and regulatory policy development. The input from this request will advance the CFTC’s mission of ensuring the integrity of the derivatives markets as well as monitoring and reducing systemic risk by enhancing legal certainty in the markets. The RFI seeks to understand similarities and distinctions between certain virtual currencies, including here Ether and Bitcoin, as well as Ether-specific opportunities, challenges, and risks. The Commission welcomes all public comments on these and related issues.

Many have made the case that Ethereum is significantly more ‘centralized’ than Bitcoin and thus have serious questions about its commodity-type traits. Others believe that the breadth of the ERC-20 (at a minimum) ecosystem makes the case for its decentralization – thus making it a clear commodity.

Whatever the arguments are either way we believe, based on one conversation with a staffer at the CFTC, that the request for comment is a mere formality. Internally the decision to designate Ethereum as a commodity is all but made.

**We have two separate and reliable sources connected to the CFTC. One was willing to give us an anonymous comment, the other spoke with us but asked that the comments be left out of this article.

As per the thinking at the CFTC:

“The request for comment is seen as a reasonable procedural process to check the box before announcing the commodity designation. Chris understands the digital assets landscape really, really well and knows that there is less consensus on this than there was for Bitcoin. This step will give some background to the decision and he expects the comments to be largely in favor of a commodity designation.”

Any policy decision in the crypto space will have long-lasting and even unintended consequences. It makes sense to consider every angle and every reasonable outcome of a commodity designation for Ethereum. Several institutions are counting on the decision going in that direction.

ErisX, Bakkt, Goldman Sachs and others have plans to list/trade Ethereum based on its eventual designation as a commodity. ErisX has already announced its intentions, Bakkt initially listed Ethereum as one of its two launch tokens before they decided to wait for the formal word from the CFTC, and Goldman Sachs is preparing to offer an Ethereum based product for its upper-crust clients.

The ripple effects of this decision will resonate throughout 2019 and give context to every other token that claims to be a commodity/utility and not a security.

The CFTC and Chris Giancarlo are playing it smart.

REPORT: COINBASE AND IRELAND: Why Has The Popular Exchange Established Corporate Residency In Ireland

After Brexit, the UK is likely to remain the European hub for digital asset firms, but digital asset firms with offices only in the UK or firms entering the EU for the first time will have to establish an office in a European Union (EU) member state in order to maintain an EU-wide presence.

These firms will remain reluctant to establish offices in Ireland. The one major exception is Coinbase, which chose Dublin as its post-Brexit base in March, so it could continue operations and services in EU member states after the UK departs the EU in March 2019.1

Other digital asset firms have been hesitant to establish operations in Ireland for a number of reasons. Ireland has not enacted legislation that explicitly regulates digital assets, offerings or services. In addition, the Central Bank of Ireland (CBI) has expressed guarded acceptance of digital asset firms, and Irish banks have also been reluctant to conduct business with digital asset firms.

In March, the CBI released a discussion paper that signaled a change in Ireland’s position on digital assets. Since then, the CBI has established a FinTech “Innovation Hub” to assist firms in developing or implementing innovations in financial services based on new technologies.

These nascent efforts will not be enough to draw firms to Ireland in the short-term, as other EU member states are aggressively pursuing similar strategies.

Lack of a Comprehensive Legal Regime Enhances Regulatory Uncertainty

Ireland has not enacted laws or rules that explicitly regulate digital assets, offerings, and services. This provides digital asset firms that are operating in or considering operating in Ireland with a low degree of regulatory certainty.

Some existing laws apply to digital assets offerings or assets. For instance, if a token issued in an initial coin offering (ICO) is deemed to be a “transferable security,” a range of financial services legislation, including the 2014 European Union Markets in Financial Instruments Directive (MiFID II), will apply.2

In other instances, the specific classification and regulation of a digital asset or offering are determined on a case-by-case basis.3 The lack of clarity poses significant problems for digital asset firms, as issuers who do not adhere to the existing regulations are subject to legal penalty.4

Banks Deny Services to Digital Asset Firms

Digital asset firms ceased operation or were compelled to open foreign bank accounts after Irish banks refused their business.5 The Bank of Ireland explicitly stated that it does not offer services to digit asset companies.6

Allied Irish Banks (AIB) stated that it “does not discriminate” in providing banking services to digital asset companies, but AIB requires digital asset firms to ensure they are in full compliance with domestic AML/CTF laws and regulations before accepting them as clients.

The denial of banking services will likely continue until regulations are enacted that explicitly categorizes digital assets and clarifies the required AML/CTF, customer due diligence and reporting practices.

Virtual Currency and Blockchain Technology Discussion Paper Released in March

In March, the Department of Finance issued a discussion paper that signaled a fundamental change in the government’s approach to digital assets.

The key objectives of the paper include the proposal to create an intra-departmental working group to coordinate the approach to virtual currencies and monitor developments in blockchain technology, and the initiation of further research into the potential implications of digital assets and blockchain. The discussion paper also reiterates earlier concerns, namely risks to consumers and investors.7

The CBI’s Assessment of Digital Assets Has Shifted from Disapproval to Guarded Acceptance

The CBI contributed to the production of the European Securities and Markets Authority (ESMA) statement, published on 13 November 2017, which warned investors of the “high risks” associated with ICOs and virtual currencies. The statement by ESMA also cautioned investors that ICOs are “highly speculative investments” and, in some cases, investors “do not benefit from the protection” that comes with regulated investments.8

A month later, the Central Bank of Ireland (CBI) issued an “Alert on Initial Coin Offerings” that stated ICO investors should be aware of unregulated activity; fraud or illicit activities; the high risk of losing all invested capital; lack of exit options ; extreme price volatility; inadequate information; and flaws in the technology”.9

The CBI has recognized that it needs to incorporate emerging technologies, including digital asset firms, into its existing framework. In April, the CBI established an “Innovation Hub” that allows FinTech firms to engage with the CBI “outside of existing formal regulator/firm engagement processes.”10

The hub will allow digital asset firms to test products, services, business models and delivery mechanisms in a controlled environment.11

Legislative Hurdles Will Continue to Limit Digital Asset Activities

Ireland is actively competing with a number of European jurisdictions that have pursued a more aggressive regulatory path or have been more accepting of digital asset firms, including Estonia, France, Gibraltar, Isle of Man, Jersey, Lithuania, Netherlands, Luxembourg, Malta, Switzerland, and the UK.

Ireland maintains a number of advantages over some of these states, but without a comprehensive regulatory framework in place, the traditional strengths of Ireland, such as a favorable corporate tax regime, strategic geographical location, and a tech-savvy population, will not be sufficient to set itself apart from its European competitors.


  1. “Coinbase expands with new Dublin office,” Coinbase Blog, 15 October 2018, https://blog.coinbase.com/coinbase-expands-with-new-dublin-office-fc2e5ebcbeb6 (accessed 19 November 2018). Coinbase’s headquarters outside the U.S. will remain in London.
  2. “Tomorrow’s yesterday: financial regulation and technological change – Gerry Cross, Director of Policy & Risk,” Speech at Joint Session: Banknotes / Identity High Meeting 2018 Security Printers, International Conference & Exhibition Hosted by Intergraf, 20 March 2018, https://www.centralbank.ie/news/article/financial-regulation-and-technological-change-gerry-cross (accessed 19 November 2018).
  3. “Tomorrow’s yesterday: financial regulation and technological change – Gerry Cross, Director of Policy & Risk,” Speech at Joint Session: Banknotes / Identity High Meeting 2018 Security Printers, International Conference & Exhibition Hosted by Intergraf, 20 March 2018, https://www.centralbank.ie/news/article/financial-regulation-and-technological-change-gerry-cross (accessed 19 November 2018).
  4. “Tomorrow’s yesterday: financial regulation and technological change – Gerry Cross, Director of Policy & Risk,” Speech at Joint Session: Banknotes / Identity High Meeting 2018 Security Printers, International Conference & Exhibition Hosted by Intergraf, 20 March 2018, https://www.centralbank.ie/news/article/financial-regulation-and-technological-change-gerry-cross (accessed 19 November 2018).
  5. “Bitcoin sellers claim they are being denied banking services by Irish lenders,” The Irish Times, 21 June, https://www.irishtimes.com/business/technology/bitcoin-sellers-claim-they-are-being-denied-banking-services-by-irish-lenders-1.3537508 (accessed 19 November 2018).
  6. “Bitcoin sellers claim they are being denied banking services by Irish lenders,” The Irish Times, 21 June, https://www.irishtimes.com/business/technology/bitcoin-sellers-claim-they-are-being-denied-banking-services-by-irish-lenders-1.3537508 (accessed 19 November 2018).
  7. “Discussion Paper: Virtual Currencies and Blockchain Technology,” Department of Finance, March 2018, https://www.finance.gov.ie/wp-content/uploads/2018/03/Virtual-Currencies-and-Blockchain-Technology-March-2018.pdf (accessed 19 November 2018).
  8. “ESMA Alerts Investors to the High Risks of Initial Coin Offerings
    (ICOs),” European Securities and Markets Authority Statement, 13 November 2017, https://www.esma.europa.eu/sites/default/files/library/esma50-157-829_ico_statement_investors.pdf (accessed 19 November 2018).
  9. “Alert on Initial Coin Offerings,” Central Bank of Ireland Information Notice, December 2017, https://www.centralbank.ie/consumer-hub/consumer-notices/alert-on-initial-coin-offerings accessed 19 November 2018).
  10. “Innovation Hub,” Central Bank of Ireland, https://www.centralbank.ie/regulation/innovation-hub (accessed 19 November 2018).
  11. “Innovation Hub,” Central Bank of Ireland, https://www.centralbank.ie/regulation/innovation-hub (accessed 19 November 2018).

EXCLUSIVE: Dutch Authorities Discussing Sandbox Options with Digital Asset Firms

Based on an e-mail received by Abacus Legal from the Financial Market Authority (AFM), the AFM and De Nederlandsche Bank (DNB) are having discussions about the Dutch regulatory sandbox “with a couple of parties at the moment that are related to digital assets.” It is unclear if the digital asset firms have only submitted questions or have requested a license to operate in the sandbox program.

These discussions about the sandbox between the digital asset firms and Dutch authorities are an encouraging sign. With the UK likely leaving the EU in March, the Netherlands will be one of a handful of EU member states with a regulatory sandbox in place. None of the remaining EU member states have accepted any digital asset firms to operate in their sandboxes.

The Dutch FinTech Sandbox 

The Dutch regulatory sandbox, governed by the AFM and DNB, was established in January 2017.  The sandbox is designed to offer FinTech firms the room for innovation, in order to allow market participants to roll out their products, services or business models. 

EUROPEAN REGULATORS: CRYPTO SKEPTICS: Even With Digital Asset ‘Sandboxes’ Established EU Lags On Regulatory Front

Four European Union (EU) member states- Denmark, Lithuania, the Netherlands and the UK-have a formal regulatory sandbox in place.Several other EU member states will also begin operating sandboxes in 2019. While this is an encouraging sign for the FinTech industry as a whole, digital asset firms may not benefit from the greater number of EU member states offering FinTech firms access to sandboxes.

Based on our review of the reporting by the regulatory agencies that have established sandboxes, the UK is the only country that tested digital asset firms in its sandbox. The limited acceptance of digital asset firms into sandboxes will likely continue in the near-term. 

UK: A Sandbox Innovator that Accepts Few Digital Asset Firms

Since mid-2016, the Financial Conduct Authority (FCA) has tested four cohorts in its regulatory sandbox.  The application process for the fifth cohort closed on 30 November 2018. The 89 firms that are undergoing or completed testing include many blockchain businesses, but only six firms that had “propositions relating to cryptoassets.” This represents less than seven percent of the FinTech firms tested by the FCA.

Digital Asset Firms Accepted into the UK’s Regulatory Sandbox

FCA Cohort Firm Description
One BitX
A cross-border money transfer service powered by digital currencies/blockchain technology.
Two ZipZap A cross-border money remittance platform that chooses the most efficient means for a payment to reach its destination, including via digital currencies.
Two Oraclize A DLT technology based e-money platform which turns digital identity cards into secure digital wallets through the use of smart contracts and fiat-backed tokens.
Three Solidi A blockchain based payments platform that uses cryptocurrencies to facilitate money remittance at a faster speed and with lower transaction costs.
Four Fineqia A Blockchain based digital platform that enables companies to issue and administer debt and equity securities, including bonds backed by cryptoassets.
Four World Reserve Trust Service that facilitates cheaper and faster global trade payments and settlement using the Silubi, an asset-linked smart token that utilizes a permissioned DLT network. 

No Other EU Member State Has Accepted a Digital Asset Firm into its Regulatory Sandbox

The three other EU member states – Denmark, Lithuania and the Netherlands – with sandboxes have not accepted any digital asset businesses into their cohorts for testing. 

Denmark’s Financial Supervisory Authority (FSA) completed its first application process for its “FT Lab” at the end of March.  The FSA stated that it will only accept five applicants in the first cohort, as this is a new initiative. According to documents on the FSA website, only two companies have been accepted into the sandbox. Neither company is a digital asset firm.

In mid-October, Lithuania began accepting applications for its regulatory sandbox, which allows potential and existing market participants to test financial innovations under the supervision of the Bank of Lithuania.  The sandbox is expected to be fully launched in 2019. To date, the Bank of Lithuania has not selected any firms to participate in the sandbox. 

The Netherlands established a sandbox in January 2017 that is governed by the Authority for the Financial Market (AFM) and De Nederlandsche Bank (DNB).  There is no official data on the number of FinTech firms tested in the Dutch sandbox, as the Netherlands does not have a transparent reporting process like Denmark and the UK.  Based on our review of government data, media reporting, and professional and academic publications, it does not appear that the Netherlands has tested any digital assets in its sandbox. 


EU Member States Establishing Regulatory Sandboxes in 2019

Poland is scheduled to launch a regulatory sandbox in 2019. The Financial Supervision Authority (KNF) selected eight sandbox operators: PKO Bank Polski, Huge Thing, D-RAFT/The Heart, Alior Bank, BusinessCaddy Foundation for Enterprise Development, Bank Pekao, Bank Handlowy w Warszawie, and Bank BGŻ BNP Paribas. 

Poland most likely will not accept any digital asset firms into its sandbox, as the government has taken a negative stance towards digital assets and the operators of the sandbox are largely Polish banks, which routinely deny services to digital asset firms. 

At least two other EU member states will establish sandboxes in 2019. In mid-November, the Norwegian Ministry of Finance stated that the Financial Supervisory Authority (FSA) will launch a regulatory sandbox.  The Spanish Ministry of Economy also issued a public consultation on a regulatory sandbox that closed in early September. Like other sandboxes, the Norwegian and Spanish sandbox will allow for a controlled and secure space where innovative companies and entrepreneurs can test their ideas, without threat of regulatory penalty.

Norway and Spain, however, will likely institute sandbox programs with modest budgets, which will limit the number of firms that can participate in the sandbox framework. 

Forthcoming European Banking Authority Guidelines

This month, the European Banking Authority(EBA) is scheduled to release guidelines for the core design of sandboxes and innovation hubs.  The EBA report will compare existing sandboxes and innovation hubs, and provide recommendations for the design of a cross-border regulatory sandbox.  The issuance of guidelines by regional authorities, however, may not provide digital asset firms with better access to regulatory sandboxes.

Some member states, such as Germany, will not fully embrace the sandbox concept. In other cases, such as Poland, a member state has taken an adverse position towards digital assets. 

Other member states have limited funding available or lack the funding to establish and maintain a regulatory sandbox. Regulators in other member states may also limit the number of firms accepted into a sandbox to ensure FinTech start-ups are not applying just to obtain free marketing. 


BREAKING: SEC SLAMS ICO EXECUTIVES: Arise Bank ICO Executives Pay Big Fines, Assets Frozen

The SEC seems to be on a roll when it comes to handing out penalties to fraudulent ICO scams. In a decision this afternoon the SEC announced significant penalties for two executives that amount to more than $2M dollars and froze the assets of the entity itself.

Attached is the SEC press release:

Two former executives behind an allegedly fraudulent initial coin offering (ICO) that was stopped by the Securities and Exchange Commission earlier this year have been ordered in federal court to pay nearly $2.7 million and prohibited from serving as officers or directors of public companies or participating in future offerings of digital securities.
AriseBank’s then-CEO Jared Rice Sr. and then-COO Stanley Ford were accused of offering and selling unregistered investments in their purported “AriseCoin” cryptocurrency by depicting AriseBank as a first-of-its-kind decentralized bank offering a variety of services to retail investors.
“Rice and Ford lied to AriseBank’s investors by pitching the company as a first-of-its kind decentralized bank offering its own cryptocurrency for customer products and services,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office.  “The officer-and-director bar and digital securities offering bar will prevent Rice and Ford from engaging in another cryptoasset-based fraud.”
To settle the SEC’s charges, Rice and Ford agreed to be held jointly and severally liable for $2,259,543 in disgorgement plus $68,423 in prejudgment interest, and each must pay a $184,767 penalty.  They also agreed to lifetime bars from serving as officers and directors of public companies and participating in digital securities offerings, and permanent prohibitions against violating the antifraud and registration provisions of the federal securities laws.  Chief Judge Barbara M.G. Lynn of the U.S. District Court for the Northern District of Texas ordered the sanctions on December 11.  Rice and Ford agreed to the settlements without admitting or denying the allegations in the SEC’s complaint.
On Nov. 28, 2018, the U.S. Attorney’s Office for the Northern District of Texas announced parallel criminal charges against Rice.
The SEC’s investigation and litigation was conducted by David Hirsch and Chris Davis and supervised by B. David Fraser and Eric R. Werner of the Fort Worth Regional Office.  Staff from the SEC’s Cyber Unit assisted with the investigation and litigation.  The SEC appreciates the assistance of the Federal Bureau of Investigation, U.S. Attorney’s Office for the Northern District of Texas, Federal Deposit Insurance Corporation, and U.S. Patent and Trademark Office.
The SEC’s Office of Investor Education and Advocacy issued an Investor Alert in August 2017 warning investors about scams of companies claiming to be engaging in initial coin offerings.

There will be more of these as the days and weeks tick off. The interesting portion of the above action is that clear fraud is found, assets are frozen, and the individuals have been barred from becoming officers of a public company and offering digital securities ever again. 

Why is that interesting? Because the SEC is recognizing the ‘digital securities industry’. That may even be the bigger headline here. But for now, lets focus on the fraudsters.

EXCLUSIVE: BAKKT AND ETHEREUM: Ethereum Contracts Were Included In Bakkt’s Initial Launch Plans; Next ‘Additional Contracts’ Product

Bakkt remains a hot topic of discussion across the crypto ecosystem. It is seen in some corners of crypto as a bear market savior while others see it as another institution watering down the original intent and purity of Bitcoin itself. Either way, it is the most talked about institutional initiative among many – and a who’s who of crypto venture capital firms have made bets that Bakkt will be a roaring success.

Of interest over the past week, with appearances at Coindesk’s Consensus Invest conference and other appearances, CEO Kelly Loeffler and Intercontinental Exchange CEO Jeffrey Sprecher made comments that hinted at more crypto futures contracts being traded on their network. Bakkt then sent out a tweet that did more than hint at the idea, rather claiming that they remain open to adding ‘additional contracts as the landscape evolves’.

The ‘landscape evolving’ is a reference to regulation, pure and simple. The guidance principally given by the SEC and CFTC will be what rule the day for institutions. But don’t fool yourself here – Bakkt already has a pretty good idea where regulation is going and are planning there next move.

Could that move be adding Ethereum contracts? We believe that it will be and we have information that gives us confidence in that call.

According to three separate sources Bakkt offering documents originally listed Bitcoin and Ethereum as launch cryptocurrency contracts. Sources familiar with those documents disclosed that Bakkt took a step back when they couldn’t get clear regulatory clarity on Ethereum that would make them comfortable enough to launch with it.

One specific quote from a well-connected source:

“Their original offering docs had ETH included but they backed away. The next time we took a look at it (Bakkt), from an investment standpoint, ETH had been removed and only Bitcoin remained. Regulatory approvals are paramount in a launch of this scale, so they thought better than to go the route of ‘ask for forgiveness’ after the fact. I would expect the next contract they offer to be Ethereum.”

The original Bakkt offering documents touted Ethereum in the same way that Bitcoin has been featured on its network. The same custody solution and physical warehousing/delivery facilities that have been all the rage for institutions since Bakkt announced its intentions.

The original inclusion of Ethereum as an ‘additional contract’ in its offering documents sends a strong signal that Bakkt will eventually offer ETH contracts and effectively mushroom ETH trading of scale.

Comments from regulators in different forums have hinted that Ethereum could be the next cryptocurrency to be dubbed a commodity instead of a security. When that happens (and we believe that it will) you can expect Bakkt to add Ethereum contracts.

The parent company by which Bakkt was birthed, Intercontinental Exchange (or better known as the I-C-E) trades trillions upon trillions of global futures contracts connected to commodities and securities of all make and manner; while also being the owner of the ‘crown jewel’ of global stock markets, the NYSE. Ergo, could Bitcoin and Ethereum be seen as the gold and silver of cryptocurrency futures contracts? We believe that to be the case.

A final download and reminder of what Bakkt actually will be doing at launch:

Bakkt is the brainchild of Jeff Sprecher, the founder, chairman, and CEO of ICE, and a disrupter par excellence. Sprecher (pronounced “Sprecker”) stands alone as the leading force in modernizing the world’s exchanges in recent years from open-outcry pits into super-efficient electronic marketplaces. Along the way, Sprecher built a flailing electricity exchange that he reportedly purchased for $1 into a global trading and data empire now worth $44 billion. “In 25 years he’s gone from nothing to the most powerful exchange entrepreneur in the world,” says Larry Tabb, chief of consultancy the Tabb Group. “He hasn’t failed yet.

“Sprecher and his investment partners are putting this one-of-a-kind mission in the hands of a first-time CEO who’s Sprecher’s soulmate in both business and in life: Kelly Loeffler. The ICE executive has ridden shotgun alongside Sprecher since the company’s fledgling days in 2002. In 2004, they married. Loeffler long ran marketing, investor relations, and communications for ICE. Now she’s giving up her ICE roles to run Bakkt.”

Keep your eyes on regulators over the coming weeks and into 2019. They hold the keys to the pace and potential scale of crypto adoption and market cap growth.

 

MORGAN STANLEY: TRADER TALK: “We talk about crypto every day around here – you can bet we’ll trade the sh** out of it in 2019…”

We spoke to three Morgan Stanley trade desk sources regarding the news from Bloomberg that the global investment bank was set to begin offering clients a ‘synthetic’ Bitcoin product and the conversations were ‘illuminating’ to say the least.

As the news of continued ‘legacy’ exchanges adding Bitcoin futures (which will, of course, be followed by other token type listings) the anticipation for client uptake and profits continues to ramp up.

Nasdaq’s announcement of a Bitcoin futures product had traders at Morgan Stanley all abuzz earlier this week. And the talk was all about volatility and profits.

**A brief description of a Morgan Stanley trade desk dude – early 30’s, unmarried, adrenaline-addicted, and in a constant search for volatility to produce market-beating performance and year-end bonuses. Good, got that out of the way.**

These three guys are all well versed in cryptocurrency lingo and practice, as each was able to produce proof that they owned cryptos. We promised to keep their identities anonymous.

One trader talked about the lust for volatility: “Price movements are everything for a trader. The larger the swings the better. As we execute or either the firm or institutional clients, the more volatility the better. If pushes action in large accounts and keeps emotions on edge. Even the choppy movement in the equity indexes over the past three months have been useful in that regard. But cryptos…wow, dude. The volatility in Bitcoin alone would be better than sex for us! Movements of 10%-20% over the course of 24 hours. Huge!

Another trader echoed the profit potential: “Just take the idea that these things trade 24 hours a day and seven days a week. That alone would create renewed profitability on trade desks everywhere. And, of course, the volatility would make bank execs wet. That is why bean counters (lawyers) here are working overtime trying to quantify risks and policies to get us on, at a minimum, Bitcoin, and eventually Ethereum. The bottom line on cryptos, we talk about them every day and the plan is to trade the sh** out of them next year. Nearly all of us have built in those profits into our projected earnings next year.”

Our final contact kept things short: “Give me all of the cryptos and watch what I could do for this place. Clients won’t stop asking about them. I’ve not seen anything like this in my career. I’ve heard, from oldheads, what it was like in 98-99 with the dot-com bubble. But even those guys say this is bigger and more emotionally driven. We’d make a sh** ton if we had access, institutionally speaking.”

These comments and the Bloomberg scoop earlier from Alistair Marsh have set off another round of institutional FOMO:

“The U.S. bank will deal in contracts that give investors synthetic exposure to the performance of Bitcoin, said the person, who asked not to be identified because the information is private. Investors will be able to go long or short using the so-called price return swaps, and Morgan Stanley will charge a spread for each transaction, the person said.”

“The bank is already technically prepared to offer the Bitcoin swap trading, and will launch once there is proven institutional client demand and after the completion of an internal approval process, the person said. A spokesman for Morgan Stanley declined to comment on the initiative.”

Every major institution that has an interest in satisfying the requests of its biggest clients and generating outsized trading profits with significant margins is offering or planning to offer access to Bitcoin and cryptos. Everybody.

It is no longer ‘Institutional FOMO’, but rather Institutional Adoption.

EPIC TROLL: BLOOMBERG CLICK BAIT: Bloomberg’s Crypto Coverage Is A Disaster; Shame On Them

Bloomberg has a dedicated team on crypto reporters. All of which have come from traditional financial markets and other beats – in the hopes to cover a hot market as it hit all-time highs late last year. Maybe that’s why their coverage of the industry, Bitcoin price fluctuations, or what old and irrelevant ‘paragons of fiat currency’ like Jamie Dimon and Warren Buffet think about the digital asset movement.

The terminal services coverage of the crypto bear market sounds like a sad replay of since embarrassed early internet era detractors. All manner of doubters decried the ‘any time now’ death of Amazon, Priceline, Ebay, PayPal, Google, and others. It is downright embarrassing – and we wonder who is approving this mindless drivel.

Take a look at this passage from today’s post about Jamie Dimon and Warren Buffet being ‘vindicated’ with $BTC hovering around $4k (which, as of this print it is actually at $4.5k) :

“The cryptocurrency experts, who clearly didn’t see this coming, are blaming all sorts of temporary culprits — from jittery markets to “hard forks” (blockchain jargon for radical technical changes in a digital currency). But they’re kidding themselves. This is a long-term unraveling of all of the lies, exaggeration and populist fantasies that drove last year’s market mania.”

**We aren’t going to provide a link back to the article, because it is hot garbage and unfit for the eyes. And as far as the above quote “…all of the lies, exaggeration and populist fantasies…” FU** YOU!

Here is another maddening passage from an article just yesterday (they seem to be churning these out at an alarming clip) :

“In September 2017, the JPMorgan Chase & Co. chief executive officer famously called Bitcoin a “fraud” and threatened to fire any employee caught trading it. While the cryptocurrency briefly fell on his remarks, it went on to rally more than fourfold in three months as crypto-mania swept the globe. Dimon became a favorite punching bag for Bitcoin bulls, even after saying later that he regretted the comments and that he believes in the digital asset’s underlying blockchain technology.”

“These days, Dimon’s Bitcoin pessimism is looking more prescient. After tumbling as much as 78 percent from its peak, the cryptocurrency has returned to its level on the day the billionaire banker issued his warning last year. Many of Bitcoin’s peers have sunk even further, with the market value of all virtual currencies tracked by CoinMarketCap.com tumbling almost $700 billion from an all-time high in January.”

Again, we aren’t going to link the article because it is three lazy paragraphs of Jamie Dimon worship and click-bait.

**A word about the term ‘click-bait and why we hate the term. Every media entity in the world engages in click-bait. Two decades ago it was called a headline. Click-bait as a dog whistle is stupid. Welcome to 2018, almost 2019.**

These articles are an embarrassment to a media organization that can clearly afford better and more informed contributors and copy. It is offensive and that is why we are calling them out.

Engaging in the mockery of a community dedicated to technology, finance, and engineering to create the next ‘super asset class’ is debased and beneath them. Do better Bloomberg, do better.

UPDATE: And the coverage has only worsened in the last 48 hours. Bloomberg is producing headlines that are both misleading and seems to be pushing some sort of fiat narrative. Again we ask, who is allowing this stuff to make it to print?

Here is the latest on their SEC Chairman Jay Clayton’s comments on Bitcoin ETF proposals;

“The head of the Securities and Exchange Commission said Tuesday that concern over a lack of investor protections makes it unlikely that his agency will approve a Bitcoin exchange-traded fund anytime soon.”

Actually, no. The commentary by Clayton was neutral at worst and contemplative at best. The last thing you could say about it was some sort of definitive word on the death of current Bitcoin ETF proposals.

CLAIM: KRAKEN AND THE SEC: Beyond Rumors, Calvin Ayre Claims Kraken Is Under SEC Investigation, To Release Evidence

Whatever your opinion happens to be about Bitcoin Cash, Bitcoin ABC, or Bitcoin SV (the prevailing opinion across the crypto ecosystem is decidedly negative) and the current ‘hash war’ it seems to be uncovering all sorts of ‘sludge’ in the crypto underbelly.

All manner of spats, quarrels, power struggles, and out and out greed is playing out right in front of us and it is having a decidedly negative effect on the overall value of the crypto markets.

**If we can speak for the larger crypto community – stop it guys. This looks and feels like a high school Instagram cat fight. The sooner it is over and forgotten, the better.**

Until it is over a few new headlines have found there way into our inboxes. Specifically Calvin Ayre and his proclamations that Kraken is under SEC investigation.

Ayre did not provide evidence for the accusations, which he’s promising to release “next week.”

While Kraken has yet to publicly react, Ayre’s words could well end up buried beneath the mountain of rhetoric, which has emerged on social media from all parties in the BCH debacle over the past week.

If true (and that is a big ‘if’ given the immature nature of the BCH battle) it would further develop our exchange story from last week. US authorities continue to evaluate and develop enforcement actions within the crypto space.

To be clear an investigation is much different than an enforcement action, an indictment, or even ongoing conversations to bring an entity into compliance. Still, there is an expectation that the SEC has a long line of coming actions in there crypto ‘zip drive’.

From last week:

Several sources from the AML/CFT, SEC, crypto hedge funds, and other crypto sources have given us thoughts and opinions on where this roadmap could lead and who could be next. Here are parts of those conversations and some explanations as to who, why, where, and when.

A former AML/CFT enforcement agent had this to say based on background conversations with two contacts at the SEC:

“There will be more actions taken. That much I am certain about. Geography is not a factor as they formulate any strategy and are having back-channel conversations. One important point to make here, sticking your thumb up the nose of the SEC over the past six months, or any other regulatory agency, has been noticed and cataloged. It is incredibly stupid to basically dare a federal or state organization to come after you. Which led our conversation to Kraken and the dialogue there CEO decided to air in public. They are firmly in the crosshairs here.”

Further dialogue regarding Kraken and their potential issues with authorities is the reason that their CEO, Jesse Powell, made claims regarding registering with the SEC earlier this year.

Yet making claims and pursuing registration is different than finalizing the process and removing yourself from any pending enforcement action. That could be at the center of Calvin Ayre’s allegations.

And we’ve said this multiple times, it is never a good idea to thumb your nose at regulators:

“I expect Kraken and Bitfinex to be the headliners to get punk’d at some point. How, when, or for what is anybody’s guess at the moment. But one of them has actively antagonized regulators (Kraken) and the other has played all sorts of legal and geographic games specific to avoiding regulators (Bitfinex). Should the SEC begin to really get frisky and take on Bitfinex that would be serious and cause some price destruction. Were I to offer a guess, I think Kraken gets slapped and Bitfinex finds a way to avoid *public* enforcement. I could see a way that a backroom conversation occurs and Bitfinex is given a ‘deal they can’t refuse’ to clean some things up.”

Regulatory actions are in process and are probably in ‘back-channel discussions’ at the moment. Calvin Ayre’s claims may be legitimate, but that doesn’t mean that Kraken is going to get killed. It may mean nothing more than a fine and registration with the SEC.

Let’s see if Ayre is actually holding the cards he claims to be or is it simply a full-throated bluff.

SEC: GUIDANCE BASED ON ENFORCEMENT: As The SEC Announces Enforcement Action Today, It Leaves Crumbs On Token Regulations To Come

Earlier today the SEC announced enforcement actions against two ICO’s that had come under scrutiny within the regulator’s offices. The enforcement actions are interesting in that they announce what steps were taken to decide on the enforcement penalties, but took extensive time to attach those enforcement actions to presumed digital asset regulation that is on its way to crypto markets.

Attached is the enforcement action in total:

“In recent years, we have seen significant advances in technologies – including blockchain and other distributed ledger technologies – that impact our securities markets. This statement[1] highlights several recent Commission enforcement actions involving the intersection of long-standing applications of our federal securities laws and new technologies.

The Commission’s Divisions of Corporation Finance, Investment Management, and Trading and Markets (the “Divisions”) encourage technological innovations that benefit investors and our capital markets, and we have been consulting with market participants regarding issues presented by new technologies.[2]  We wish to emphasize, however, that market participants must still adhere to our well-established and well-functioning federal securities law framework when dealing with technological innovations, regardless of whether the securities are issued in certificated form or using new technologies, such as blockchain.

The Commission’s recent enforcement actions involving AirFox, Paragon, Crypto Asset Management, TokenLot, and EtherDelta’s founder,[3] discussed further below, illustrate the importance of complying with these requirements. Broadly speaking, the issues raised in these actions fall into three categories: (1) initial offers and sales of digital asset securities (including those issued in initial coin offerings (“ICOs”)); (2) investment vehicles investing in digital asset securities and those who advise others about investing in these securities; and (3) secondary market trading of digital asset securities. Below, we provide the Divisions’ views on these issues. 

Offers and Sales of Digital Asset Securities

The Commission has brought a number of actions involving offerings of digital asset securities. To date, these actions have principally focused on two important questions.  First, when is a digital asset a “security” for purposes of the federal securities laws?[4] Second, if a digital asset is a security, what Commission registration requirements apply?[5] The importance of these and related issues is illustrated by several recent Commission enforcement actions involving digital asset securities. In particular, the remedial measures in two of these matters demonstrate a way to address ongoing violations by issuers that have conducted illegal unregistered offerings of digital asset securities.

Today, the Commission issued settled orders against AirFox and Paragon in connection with their unregistered offerings of tokens. Pursuant to these orders, AirFox and Paragon will pay penalties and also have undertaken to register the tokens as securities under Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”) and to file periodic reports with the Commission. They have also agreed to compensate investors who purchased tokens in the illegal offerings if an investor elects to make a claim. The registration undertakings are designed to ensure that investors receive the type of information they would have received had these issuers complied with the registration provisions of the Securities Act of 1933 (“Securities Act”) prior to the offer and sale of tokens in their respective ICOs. With the benefit of the ongoing disclosure provided by registration under the Exchange Act, investors who purchased the tokens from the issuers in the ICOs should be able to make a more informed decision as to whether to seek reimbursement or continue to hold their tokens.[6]

These two matters demonstrate that there is a path to compliance with the federal securities laws going forward, even where issuers have conducted an illegal unregistered offering of digital asset securities.

Investment Vehicles Investing in Digital Asset Securities

The Investment Company Act of 1940 (“Investment Company Act”) establishes a registration and regulatory framework for pooled vehicles that invest in securities. This framework applies to a pooled investment vehicle, and its service providers, even when the securities in which it invests are digital asset securities.[7]

On Sept. 11, 2018, the Commission issued the Crypto Asset Management Order, finding that the manager of a hedge fund formed for the purpose of investing in digital assets had improperly failed to register the fund as an investment company. The order found that the manager engaged in an unlawful, unregistered, non-exempt, public offering of the fund. By investing more than 40 percent of the fund’s assets in digital asset securities and engaging in a public offering of interests in the fund, the manager caused the fund to operate unlawfully as an unregistered investment company. The order also found that the fund’s manager was an investment adviser, and that the manager had violated the antifraud provisions of the Investment Advisers Act of 1940 (“Advisers Act”) by making misleading statements to investors in the fund.

Investment vehicles that hold digital asset securities and those who advise others about investing in digital asset securities, including managers of investment vehicles, must be mindful of registration, regulatory and fiduciary obligations under the Investment Company Act and the Advisers Act.[8] 

Trading of Digital Asset Securities

Commission actions[9]and staff statements[10]involving secondary market trading of digital asset securities have generally focused on what activities require registration as a national securities exchange or registration as a broker or dealer, as those terms are defined under the federal securities laws.

Exchange Registration

Advancements in blockchain and distributed ledger technology have introduced innovative methods for facilitating electronic trading in digital asset securities. Platforms colloquially referred to as “decentralized” trading platforms, for example, combine traditional technology (such as web-based systems that accept and display orders and servers that store orders) with new technology (such as smart contracts run on a blockchain that contain coded protocols to execute the terms of the contract). These technologies provide the means for investors and market participants to find counterparties, discover prices, and trade a variety of digital asset securities.

A platform that offers trading in digital asset securities and operates as an “exchange” (as defined by the federal securities laws) must register with the Commission as a national securities exchange or be exempt from registration. The Commission’s recent enforcement action against the founder of EtherDelta, a platform facilitating trading digital assets securities, underscores the Division of Trading and Markets’ ongoing concerns about the failure of platforms that facilitate trading in digital asset securities to register with the Commission absent an exemption from registration.[11]

According to the Commission’s order, EtherDelta—which was not registered with the Commission in any capacity—provided a marketplace for bringing together buyers and sellers for digital asset securities through the combined use of an order book, a website that displayed orders, and a smart contract run on the Ethereum blockchain.  EtherDelta’s smart contract was coded to, among other things, validate order messages, confirm the terms and conditions of orders, execute paired orders, and direct the distributed ledger to be updated to reflect a trade.[12] The Commission found that EtherDelta’s activities clearly fell within the definition of an exchange and that EtherDelta’s founder caused the platform’s failure either to register as a national securities exchange or operate pursuant to an exemption from registration as an exchange.[13]

Any entity[14]that provides a marketplace for bringing together buyers and sellers of securities, regardless of the applied technology, must determine whether its activities meet the definition of an exchange under the federal securities laws. Exchange Act Rule 3b-16 provides a functional test to assess whether an entity meets the definition of an exchange under Section 3(a)(1) of the Exchange Act. An entity that meets the definition of an exchange must register with the Commission as a national securities exchange or be exempt from registration, such as by operating as an alternative trading system (“ATS”) in compliance with Regulation ATS.

Notwithstanding how an entity may characterize itself or the particular activities or technology used to bring together buyers and sellers, a functional approach (taking into account the relevant facts and circumstances) will be applied when assessing whether a system constitutes an exchange.[15]  The activity that actually occurs between the buyers and sellers—and not the kind of technology or the terminology used by the entity operating or promoting the system—determines whether the system operates as a marketplace and meets the criteria of an exchange under Rule 3b-16(a).  For instance, the term “order” for purposes of Rule 3b-16 is intended to be broadly construed, and the actual activities among buyers and sellers on the system—not the labels assigned to indications of trading interest—will be considered for purposes of the exchange analysis.[16]

The exchange analysis includes an assessment of the totality of activities and technology used to bring together orders of multiple buyers and sellers for securities using “established non-discretionary methods”under which such orders interact.[17]  A system “brings together orders of buyer and sellers” if, for example, it displays, or otherwise represents, trading interest entered on a system to users or if the system receives users’ orders centrally for future processing and execution.[18]

A system uses established non-discretionary methods if it provides a trading facility or sets rules.  For example, an entity that provides an algorithm, run on a computer program or on a smart contract using blockchain technology, as a means to bring together or execute orders could be providing a trading facility. As another example, an entity that sets execution priorities, standardizes material terms for digital asset securities traded on the system, or requires orders to conform with predetermined protocols of a smart contract, could be setting rules. Additionally, if one entity arranges for other entities, either directly or indirectly, to provide the various functions of a trading system that together meet the definition of an exchange, the entity arranging the collective efforts could be considered to have established an exchange.

Entities using blockchain or distributed ledger technology for trading digital assets should carefully review their activities on an ongoing basis to determine whether the digital assets they are trading are securities and whether their activities or services cause them to satisfy the definition of an exchange. An entity engaging in these types of activities should also consider other aspects of the federal securities laws (and other relevant legal and regulatory issues) beyond exchange registration requirements.

Broker-Dealer Registration

An entity that facilitates the issuance of digital asset securities in ICOs and secondary trading in digital asset securities may also be acting as a “broker” or “dealer” that is required to register with the Commission and become a member of a self-regulatory organization, typically FINRA.  Among other things, SEC-registered broker-dealers are subject to legal and regulatory requirements that govern their conduct in the marketplace and that provide important safeguards for investors.

Section 15(a) of the Exchange Act provides that, absent an exception or exemption, it is unlawful for any broker or dealer to induce or attempt to induce the purchase or sale, of any security unless such broker or dealer is registered in accordance with Section 15(b) of the Exchange Act. Section 3(a)(4) of the Exchange Act generally defines a “broker” to mean any person engaged in the business of effecting transactions in securities for the account of others. Section 3(a)(5) of the Exchange Act generally defines a “dealer” to mean any person engaged in the business of buying and selling securities for such person’s own account through a broker or otherwise. As with the “exchange” determination, a functional approach (taking into account the relevant facts and circumstances) is applied to assess whether an entity meets the definition of a broker or dealer, regardless of how an entity may characterize either itself or the particular activities or technology used to provide the services.[19]

The Commission’s recent TokenLot Order illustrates the application of the broker-dealer registration requirements to entities trading or facilitating transactions in digital asset securities, even if they do not meet the definition of an exchange. According to the order, TokenLot was a self-described “ICO superstore” where investors could purchase digital assets, including digital asset securities, during or after an ICO, including in private sales and pre-sales. The parties’ brokerage activities included marketing and facilitating the sale of digital assets, accepting investors’ orders and funds for payment, and enabling the disbursement of proceeds to the issuers. They also received compensation based on a percentage of the proceeds raised in the ICOs, subject to a guaranteed minimum commission. TokenLot also acted as a dealer by regularly purchasing and then reselling digital tokens for accounts in TokenLot’s name that were controlled by its operators.

Conclusion

The Divisions encourage and support innovation and the application of beneficial technologies in our securities markets. However, the Divisions recommend that those employing new technologies consult with legal counsel concerning the application of the federal securities laws and contact Commission staff, as necessary, for assistance. For further information, and to contact Commission staff for assistance, please visit the Commission’s new FinHub page.”

Deconstructing the attachment to regulations that are coming to the tokenized asset space is best found here: https://twitter.com/MeatTC_/status/1063455967017345025